RBI Asks
Banks to Make Regulatory Provisions for NPAs

If you
remember the previous article about “Why NPAs went up sharply in 2016” I had
talked about Banks having to make Regulatory Provisions of 15% of the loan
amount for Bad Loans.

This
Provision is nothing but liquid cash the Bank has to set aside for security
purposes. If a Bank has 100 crores of Bad Loans, it has to keep aside 15 crores
for the same. This 15 crores cannot be used for granting new loans. Now,
imagine the plight of a Bank like IOB that has about 30,000+ crores in Bad
loans. That means they have to set aside 4500 crores which is a lot of money.
The same goes for all banks, 100’s of 1000’s of crores has to be set aside by
these banks just to meet the Regulatory requirements set forth by RBI.

You may ask
me why does RBI Set such rules – Simple: “To Protect Your (Depositor)
Interest”. Let me explain a bit more. We all know that banks grant loans using
the deposits made by other customers. If a loan defaults, does that mean bank
will not repay the deposit done by another customer? Absolutely NOT. It is our
hard earned money and the Bank has No Right to refuse payment. By asking Banks
to set aside 15% of their NPAs, there is a pool of money that the Bank can use
in case those NPA’s become defaults. Instead of impacting customer withdrawals
from Deposits, this Regulatory provision money gets used instead. Get the
picture?

Do Banks
have Enough Money to make these Provisions?

There have
been news/rumors floating around in the past few months that the central
government would have no choice but to infuse fresh capital to meet these
regulatory provisions because most banks did not have enough money to set aside
15% of their NPAs. However, with this Demonetization initiative started in
November, Banks have seen an overwhelming amount of money being deposited by
customers. Nearly 15 lakh crores worth of cash has entered into the Indian
Banking System. That is nearly 3 times as much as the NPAs in total. This
should give enough room for the Banks to set aside the requisite Regulatory
Provisions without actually failing to meet RBI norms.

I had
already talked about this topic in the article on Detailed Impact of
Demonetization and want to reiterate that this Demonetization is actually a
blessing in disguise for at least the Banks in India because, without this,
they would’ve been facing really tough times in 2017.

Outlook for
the Indian Banking Sector for 2017 (For People Keen on Investing in Banking
Stocks)

I would say
that, the outlook for the Banking Sector in India as whole is somewhere between
Neutral to Positive. The tough times are actually past us because the bulging
NPA numbers have already been declared and thankfully Demonetization has given
enough cash for banks to handle the Regulatory Provisions. The profitability of
Banks may not be at par with what we have seen in the past years but it wont be
bad either. With the Governments push toward a Digitized Economy, banks are
expanding and reaching more parts of our country where it never ventured
before. This would help increase credit growth to the double digit % range
(~10-12%) and boos business numbers as well.

In terms of
volumes PSU Banks would probably post impressive figures but I feel that
Private Banks will continue to outperform PSU Banks primarily due to superior
fundamentals.

What do you
think about this article? Do sound off in the comments section.

Friday, January 27, 2017

In the previous article we saw that the
year 2016 saw a tremendous rise in NPAs across Banks in India and also saw the
outstanding NPA’s on a per bank basis. With those numbers in the background, it
is obvious that the Banking Industry in India is on the verge of a major
crisis. But, the more important question is, Why or How did this happen?

How did this NPA Story Come About?

In just the first 2 quarters of 2016,
nearly 2 lakh crores worth of NPAs were declared by banks. The interesting
question here is, how come Banks did not disclose these NPA’s all these years
and why are they doing it all of a sudden?

The RBI set a target of March 2017 for all
Banks to clean up their balance sheets and disclose the actual value of bad
loans. So, the banking system that had a tendency of hiding bad loans and show
a healthier than real figures to the investors, had to perform a clean-up and
slowly start declaring the true picture. Take any bank, they can’t just say in
Feb or March of 2017 that 10,000 crores is their NPA while the RBI released
this deadline more than a year back - Right?

How did Banks Get Away with Declaring Bad
Loans?

When a loan is in a restructured asset
category, it isn’t considered a Bad Loan or NPA yet. Banks happily pushed loans
at the first sight of trouble into this restructured loans basket and retained
them as regular assets. Since the loan isn’t declared an NPA, the very same
people could continue to borrow every more from the same banks or other banks
because the borrower isn’t tagged as a defaulter yet.

Why Did RBI give this deadline?

NPAs have always been a point of contention
between RBI and the Banks in general. If left unattended, the NPAs could
potentially drive the Indian Economy into a bottomless pit from which it cannot
recover. The RBI withdrew regulatory forbearance on restructured loans, making
it mandatory for banks to make provisions on a restructured loan at par with a
bad loan. This means, the banks have to set aside 15% of the loan amount as
provisions even if the loan is being restructured. Earlier provisions were only
required to be made for NPAs.

Previously if a 100 crore loan is not
receiving interested payments for 90 days, the banks had two choices – declare
100 crore as an NPA and mark the borrower as a defaulter. This would of course
look bad on the banks balance sheet. So, they mark this 100 crore as a “To be
Restructured” loan which technically isn’t an NPA yet and hence delayed adding
this 100 crores to the NPA bucket. By doing this clever trick, banks kept
adding more and more loans into this restructuring model and avoided adding
them as NPA. When RBI declared that provisions need to be made even for
restructured loans, banks don't have any incentive to keeping loans in the
restructuring bucket. Since the loans aren’t earning any interest, they might
as well mark them as an NPA and move on.

What Caused this Accumulation of Bad Loans
with Banks?

Take Indian overseas bank & UCO as
example, nearly 20% of their loans fall in the NPA category. Still, they are
functioning well with no one taking any flak for this scenario. Things are
going on per usual because they know that when the bank is in trouble, the
Government will Bail them out because at the end of the day, the Indian
Government owns these PSU Banks – plain and simple.

Most PSU Banks are like the puppets of the
ruling government. The Chairmen have no choice but to listen to their bosses in
the Government. In order to show quantity, quality gets compromised. PSU Banks
have indulged in careless lending and even if they want to scrutinize any
application or initiate recovery proceedings against a defaulter, there is
political intervention which results in the bank moving the loan into the
restructuring bucket.

In one of my earlier articles on the
kingfisher Vijay Mallya fiasco, a friend of mine had raised a question about
the multiple times the PSU Banks allowed the restructuring of loans taken by
Vijay Mallya without any collateral. More importantly, they allowed further
loans even though hundreds of crores worth of unpaid loans existed already.

Do you think a private bank would’ve
allowed something like this?

When compared to Government Run Banks,
Private Banks indulge in a more thorough evaluation or due-diligence before
sanctioning a loan. They also monitor borrowers post the loan disbursement much
better in comparison to PSU banks. To top it all off, they initiate recovery
proceeds when a loan becomes an NPA while PSU banks get pressure to restructure
loans instead of marking the borrower as a defaulter.

Have all NPA’s come out already?

I don't think so. NPAs are coming out in
truckloads and this scenario will most likely continue in the coming months
leading up to the deadline of March 2017.

Some Last Words:

In order for banks to keep aside cash
provisions against their bad loans, thousands of crores worth of money would
need to be infused into the banking system by the government. As I had
mentioned in my earlier article on Demonetization, willingly or not, citizens
have deposited nearly 14 lakh crores worth of old notes into the banking
system. So, banks have enough cash to meet these provisioning needs but this is
more like a temporary fix to a big problem.

Hopefully the RBI and Banks clean up their
act and avert a catastrophe that has just been delayed and could happen very
quickly unless otherwise…

What do you think about this situation?
Please sound off in the comments section.

Disclaimer: All statistics were taken from
the internet and the author does not guarantee the accuracy of the same or
assume any liability owing to them being incorrect. This is not a politically
motivated post and hence please avoid comments supporting or blaming any
political party in this blog.

Thursday, January 26, 2017

The Banking industry in India has always been one of the most favoured in our country thanks to solid and stellar numbers declared year after year. But, if you take the last year 2016 and dig a little deeper into the numbers, there is one glaring problem that has come out – Non Performing Assets or NPA’s. In layman terms an NPA refers to a Bad Loan that has defaulted. Would these NPA’s push the Indian Banking Scene into a Major Crisis? That’s what you will find out in this article…

Year 2016 – The Increasing NPAs

The Banks in India are currently reeling under a lot of pressure. The amount of NPAs on their books is steadily on the rise with 2016 seeing never before seen rise in NPAs. Look at the chart below for the quarterly growth of NPAs from Dec 2013 until June 2016 (Because official statistics for Q3 and Q4 of 2016 are not available on the web yet)

In just the first half of 2016 the NPAs have gone up by around 2 lakh crores. Don’t be surprised, the numbers below are not exaggerations or made up. They are the actual stats released by RBI and as of June 2016 the total outstanding bad loans on the books of Banks in India is more than 6 lakh crores.

If we dig a little deeper and try to understand on a per bank basis, no surprises there either. State Bank of India, the largest bank in our country has about 93,137 crores as NPAs. Though this is a huge number, it translates to around 8% of the total loans granted by SBI. That is a whole lot of bad loans isn’t it?

Even though SBI is the highest in sheer NPA value, the worst in terms of % is Indian Overseas Bank. Even though their total outstanding NPAs is 30,239 crores, it translates to 20.27% of all its loans. This means 1 in 5 rupees given out by IOB as a Loan is an NPA. A very close second is UCO Bank with 21,495 crores in NPA which translates to 18.66% of its loans. In third place is Bank of India with 43,935 crores in NPA which translates to 16% of its loans.

Look at the table below and you will be able to see the bank wise stats in terms of their total loans in rupees, the NPA as well as the % of NPAs.

Bank Name

Total Loans (Crores)

NPA (Crores)

NPA Ratio %

State Bank of India

1193325

93137

7.8%

Punjab National Bank

356958

55003

15.4%

Bank of India

274391

43935

16%

Bank of Baroda

269115

35604

13.23%

Canara Bank

311615

30480

9.78%

Indian Overseas Bank

149217

30239

20.2%

Union Bank of India

242935

25560

10.5%

Central Bank of India

185719

25107

13.5%

IDBI Bank Limited

202304

21724

10.7%

UCO Bank

115166

21495

18.66

Allahabad Bank

145328

18769

12.9%

Corporation Bank

142787

15726

11%

Andhra Bank

137228

14137

10.3%

Syndicate Bank

167759

13475

8%

Bank of Maharashtra

103148

13040

12.6%

State Bank of Patiala

85239

11365

13.33%

United Bank of India

70781

10104

14.27%

Dena Bank

81114

9636

11.87%

State Bank of Hyderabad

112420

9436

8.39%

Indian Bank

122173

8690

7.11%

Vijaya Bank

90199

6589

7.3%

State Bank of Travancore

68276

6401

9.37%

Jammu & Kashmir Bank Ltd.

50640

4715

9.31%

State Bank of Bikaner & Jaipur

74033

4593

6.2%

Punjab & Sind Bank

63134

4566

7.2%

State Bank of Mysore

55228

4323

7.8%

IDFC Bank Limited

49714

3030

6.09%

Federal Bank Ltd.

59408

1747

2.94%

South Indian Bank Ltd.

41705

1652

3.96%

Karnataka Bank Ltd.

35412

1389

3.9%

IndusInd Bank Ltd.

93667

861

9.19%

City Union Bank Ltd.

21216

555

2.6%

Tamilnad Mercantile Bank Ltd.

22329

489

2.19%

Catholic Syrian Bank Ltd.

7859

455

5.8%

DCB Bank Ltd

13464

231

1.7%

Bharatiya Mahila Bank Ltd.

627

3

0.4%

Disclaimer: All statistics were taken from the internet and the author does not guarantee the accuracy of the same or assume any liability owing to them being incorrect. This is not a politically motivated post and hence please avoid comments supporting or blaming any political party in this blog.

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